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CENTRAL AND SOUTH AMERICAN 

TRADE AS AFFECTED BY THE 

EUROPEAN WAR 



BY 



JAMES A. FARRELL 

President of the United States Steel Corporation ■mmI 
Ctiairman of the National Foreign Trade Council 



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Publication No. 901 

Reprinted from America's Intekests as Affected by the EuHorivvN War 

Vol. LX of The Annals of the 

American Academy of Political and Social Science 

Philadelphia, .July, 1015 






APR iei92? 



Reprinted from The Annals of the American Academy of Political and Social 

Science, Publicadelphia, Jxily, 1915. 

Publication No. 901. 



CENTRAL AND SOUTH AMERICAN TRADE AS AFFECTED 
BY THE EUROPEAN WAR 

By James A. Farrell, 

President of the United States Steel Corporation and Chairman of the National 
Foreign Trade Council. 

The commercial interdependence of modern nations became 
strikingly apparent when the first shock of the European war halted 
neutral commerce as abruptly as that of the belligerents. Although 
transportation and exchange were dislocated in every country of the 
globe, probably no other neutral nations were affected to so serious 
an extent as were the twenty Latin American republics to the south 
of us. Not only were their business relations with the United King- 
dom, France, Germany, Austria and Belgium subjected to an ab- 
normal strain, but their commerce with each other and with the 
United States was interrupted and is only now beginning to resume 
encouraging proportions. 

The completion of the Panama Canal and propaganda in favor 
of closer relations with our sister republics are partially responsible 
for the fact that the American public has developed a tendency to 
view world trade in terms of Latin America, overlooking the fact 
that the total trade of the twenty republics with other nations and 
with each other is but 6 per cent of the total foreign trade of the 
world, and that the Dominion of Canada normally buys more from 
us than the whole of Latin America. 

Educational Power of Varied Trade 

Those who, by reasonof .their. interest in the greater consuming 
markets, may view this attitude of the American public with dis- 
appointment, should realize, however, that the study of the many 
conditions governing this trade and the tariffs and laws to which 
it is subject is rapidly acquainting the general public with valuable 
knowledge concerning foreign trade policy. It is needless to look 
beyond our Latin American export trade for examples of the strength 
and weakness of our commercial intercourse with all nations. 

In gauging the effect of the European war upon Central and 

1 



4 The Annals of the American Academy 

Effect of War 

Even before the outbreak of the war the effect on Latin Amer- 
ican markets of curtailed European investment, beginning with the 
second Balkan war, was marked. Dependent as new enterprises 
were upon the selling of securities on the British and Continental 
bourses, prosperity in South America had long been dependent on 
the European money market, and all industry and most govern- 
ment finance showed distress a full year before the great European 
war began. 

When hostilities were declared, the situation became the worst 
in their history, and moratoria were promptly declared in practically 
every country.* Pending loan negotiations were halted, new con- 
struction was suspended, sterling exchange, the almost universal 
currency of Latin American trade, soared to unprecedented heights, 
steamship communication was interrupted, and confidence was com- 
pletely impaired. The demoralizing effect of the crisis upon the 
domestic, as well as the foreign business of the United States, is not 
yet forgotten; in Latin America it was even more severe. Trade 
between the United States and South America came almost to a 
halt and, even after British control of the sea restored transporta- 
tion, the credit situation and the difficulties of collections prevented 
the resumption of normal business. 

Purchasing Power Curtailed 

Those whose enthusiasm led them to believe that, with Ger- 
many out of the race for trade, the United States could immediately 
gain the export trade formerly enjoyed by that country, failed to 
consider the fact that Latin American purchasing power had shrunk 
by reason of the curtailment of British investment and the loss of 
the German, Austrian and other customary European markets for 
their products. More thoughtful exporters realized that the 
mechanism of commerce must be restored before present business 
could be taken care of, leaving aside the question of a greater future 
trade. The disadvantage of the former custom of liquidating 
transactions in our trade with Latin America at London in sterling 
bills of exchange was made apparent, and its excessive expense bred 
in exporters and importers the desire for the establishment of dollar 
exchange and direct settlements between this country and southern 



Central and South American Trade 5 

markets. In the furtherance of this desire, the federal reserve bank- 
ing law is timely. Its authorization of the federal reserve banks to 
deal in acceptances representing transactions in the export and 
import trade created in each of the great export centers a discount 
market for this paper, with the result that bills drawn on oversea 
customers find ready sale when accepted by banks belonging to the 
federal reserve system, and the extension of credits has been greatly 
facilitated. 

Immediately the war assumed its present gigantic proportions, 
it was plain that the purchasing power of Latin America had dwin- 
dled to the value of its exportable products, and much depended, 
therefore, upon the state of crops, such as wheat in Argentina, 
coffee in Brazil, and elsewhere. 

Situation Improving 

Fortunately, these crops were large and foodstuffs commanded 
unusually high prices in the European market, with the result that, 
within the last three months, trade has quickened, confidence has 
been partially restored, and business is beginning to be conducted 
"as usual," except that all new construction is at a standstill and 
no extensive development is contemplated until the end of the war. 

A notable effect of the war in our commercial relations with 
Latin America has been the increasing reexportation of characteris- 
tic Central and South American products. New York and other 
ports of the United States are now important distributing points for 
international commerce, as shown by the fact that exports of foreign 
merchandise for the eight months ending February, 1915, were 
valued at $33,166,512, as against $20,541,138 for the same period in 
the previous year. This gain was especially notable in the case of 
cacao, the reexports of which increased more than fivefold, reaching, 
for the eight months ending with February, a total value of $2,835,- 
591. The reexports of coffee leaped from $968,530 to $4,482,368. 
This was largely due to the closure of Hamburg and conditions 
prevailing in other European ports, formerly the center of the world- 
distributing trade. In comparison with these old-world centers, 
New York became the greatest open port. By reason of restrictions 
placed upon the export of rubber by the United Kingdom, to prevent 
its being used by the enemy, the importance of American ports for 



6 The Annals of the American Academy 

the distribution of India rubber greatly increased, the value of 
reexports growing about 80 per cent. 

Trade Balance Adverse to United States 

During the eight months ending February 28, 1915, our exports 
to all Latin America and the West Indies were valued at $159,742,- 
863, as compared with $212,227,558 for the corresponding period 
ending February 28, 1914, a decrease of 25 per cent, while our world 
exports during the same period decreased 3f per cent. Our imports 
from the same countries, during the same period of the present fiscal 
year, amounted to $316,374,763 against $289,318,891, an increase 
of '9 per cent, although our world imports decreased 13 per cent. 
This comparison shows a trade balance of $156,631,900 in favor of 
Latin America and the West Indies, which will adequately answer 
the demand of those who are urging us to buy more freely from Latin 
America, but even in normal times, the balance is in our neighbors' 
favor. Under the provisions of the federal reserve law, we can 
reasonably look for largely increased sales of American products. 

The reasons for this decrease in our exports were the practical 
suspension of commerce during the first few weeks of war and the 
acute depression which followed. This decrease was noticeable in 
shipments of all construction materials, such as iron and steel manu- 
factures, lumber and cement, agricultural machinery and equipment, 
automobiles, railway cars, locomotives, sewing-machines and other 
highly finished manufactures, while exports of actual necessities 
occasionally increased, by reason of the lack of European competi- 
tion. For instance, exports of coal, which, before the war, except 
to Central America, were not heavy, trebled to Argentina, and 
greatly increased to Brazil, while shipments of American paper, 
because of the need of replenishing stocks and the elimination of 
German competition, also grew in volume, while inquiries began to 
pour in for numerous small lines, thus increasing the diversification 
of our export trade. At the close of the war, however, we will find 
it necessary to exert every effort to maintain this newly-won trade 
against the determined competition of Europe. 

The increase in value of imports from Latin America is largely 
due to higher prices of various products, combined with the fact that 
trade routes have been changed and New York has become more 



Central and South American Trade 7 

active as a distributing point, as shown in the case of cacao, some 
importers of the Ecuadorian, Brazilian and Dominican product 
expecting to see it become the greatest distributing point in the 
world. The use of cocoa and chocolate in the ration of the modern 
army proved the salvation of Latin American cacao growers. 

The demand of the European belligerents for foodstuffs and 
supplies has saved the situation both in Latin America and the 
United States. The development of Latin America cannot proceed, 
however, without foreign capital. Citizens of the United Kingdom 
are forbidden, during the war, to invest in foreign enterprises, which 
eliminates England, France, Germany or Belgium, leaving the 
United States as the only great nation whose trade balance is in- 
creasing and whose gold is accumulating. 

Source of Future Investment 

That American capital is educated to foreign investment is 
proven by the fact that its holdings in the Dominion of Canada are 
nearly seven hundred million dollars, exclusive of agriculture, and 
half a billion dollars in Mexico, Central America, Cuba, Haiti, 
Santo Domingo, Chile and Peru. Since the beginning of the war, 
fifteen million dollars of short term Argentine treasury notes have 
been taken in the United States, one of the conditions of the issue 
being that the proceeds should remain in the United States as a 
credit against the Argentine purchases of American merchandise. 
This unusual condition illustrates the advantage of making loans 
to countries which can become large purchasers of our products. 

British investors are retaining their Latin American properties, 
which will prove more valuable than ever after the war, in view of 
their freedom from the heavy taxes which war imposes upon invest- 
ments in the United Kingdom. How important a part British 
capital will play in the financing of Latin America after the war 
remains to be seen, but the consensus of financial opinion seems to 
be that interest rates will materially increase, and the amount of 
this increase, as compared with the price of United States loans, will 
doubtless determine the question of who is to be the chief investor 



8 The Annals of the American Academy 

Relation of Investment to Export Trade 

Of greater importance than the interest rate is the creation of 
a greater export market for American manufactures through rail- 
way and industrial loans. By reason of European investment, the 
area into which we can expect to send American exports is restricted. 
For instance, in view of the fact that railways promoted by European 
capital are confining their purchases of materials to Europe, our 
only field for railway supplies and equipment has been the govern- 
ment railways. When the output of American factories is increased 
by foreign investment, the investment becomes in reality a domestic 
investment and its encouragement by the United States govern- 
ment should naturally be expected. Upon this attitude will depend 
largely the future of American business enterprise abroad. With 
governmental support and inteUigent cooperation between investors 
much can be accomplished, although some hesitancy on the part of 
capital may be encountered, owing to the deterrent effect of the 
Mexican revolution. However, the awakened interest of the entire 
American business pubUc in the possibilities of Latin American 
trade is a great assurance of future increase. 

While the establishment of dollar exchange will not, perhaps, 
entirely replace confidence in sterling bills at the conclusion of war, 
a beginning has been made for American banking. 

Excessive versus Adequate Credits 

Although much is said in favor of conducting business in accord- 
ance with the desires and standards of our Latin American customers 
we should remember that this applies only to what is recognized 
by the world to be sound business practice. Arguments in favor 
of granting six, nine and twelve months' credit do not recognize the 
fact that extension of unusual credits was an important factor in the 
industrial depression preceding the war, Germany's eagerness for 
British trade having led many German firms to extend credits which 
deferred merchants' obhgations several months beyond the time 
when they realized on the purchased goods. With this ready money 
at hand, the merchant frequently speculated in land, with the result 
that collapse of the land boom caused heavy losses and failure to 
pay at maturity of even these long credits. 



Central and South American Trade 9 

British exporters frequently voluntarily suffered the loss of old 
and valued business in preference to extending excessive credits, 
and Americans with experience in Latin American trade are of the 
opinion that the limit of credit should be sufficient only to cover 
the time required by purchaser to realize on the goods bought, 
taking into consideration the harvesting and marketing of crops. 



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